How Do Organizations Come Into Existence - Towards an Evolutionary Theory of Entrepreneurship

8/8/2019 How Do Organizations Come Into Existence - Towards an Evolutionary Theory of Entrepreneurship

1/39

HOW DO ORGANIZATIONS COME INTO EXISTENCE?

TOWARDS AN EVOLUTIONARY THEORY OF ENTREPRENEURSHIP

Pierre-Yves Gomez

EM Lyon

BP 174, Ecully Cedex 69132

France

Email: [email protected]

Thierry Volery

EM Lyon

BP 174, Ecully Cedex 69132

France

Email: [email protected]


2/39


3/39

- 3 -

How do organizations come into existence? This question at the root of entrepreneurship still

puzzles researchers and it is yet to be answered in a totally satisfactory manner (Gardner, 1985).

Early research in entrepreneurship tried to tackle this question by focusing on the psychological

characteristics of business founders (Brockhaus, 1980; DeCarlo & Lyons, 1979; McClelland,

1961). This lead to an endless list of characteristics associated with the entrepreneur but it failed

to explain the process of organization formation. A response to the limited success of the trait

approach has been to view enterprise creation in context. One way of doing this is to apply a

more aggregate level of analysis and to look for environmental variables that can explain variations

in the rate of new enterprise formation (Aldrich, 1990). In that respect, social, economic, political,

infrastructure development, and market emergence factors (Moran & Ghoshal, 1999; Specht,

1993) can significantly influence the entrepreneurs intention. Overall, these approaches, albeit

giving interesting insight into the factors leading to entrepreneurship and new ventures from a

macro-social point of view, do not throw light on the process of organization emergence from a

micro-social point of view.

Researchers have traditionally centered on profit being the rationale of the existence of

organizations (Casson, 1992; Knight, 1921). From this point of view, organizations emerge

because they aim to and succeed in realizing profit. However, every day experience shows that

there are many non profitable business ventures which are established only to fail later, or that

some firms emerge despite a negative profit rate. Profit, therefore, cannot be a discriminating

factor to explain the coming of firms into existence. This suggests a separation between the


4/39

- 4 -

emergence of organizations and their survival. By focusing on profit, the classical economic view

emphasizes the problem of survival and underestimates the genesis of organization, thus failing to

explain comprehensively why and how new organizations emerge.

The basic assumption of this article is that a evolutionist perspective can better tackle this

phenomenon than an economic one. In the first part of the paper we identify a fundamental

paradox that exists in the economic literature due to the discontinuous nature of the entrepreneurial

process. We show why an evolutionary point of view could help to resolve that paradox. In part

two, we propose a framework of the entrepreneurial process drawn from Campbells (1965)

seminal work on evolutionary theory. This framework outlines a basic definition of the

entrepreneur and describes the stages of the evolutionary process as projection, selection and

retention (Baum & McKelvey, 1999) in order to put together numerous empirical evidence

collected by research in entrepreneurship. Finally, we try to evaluate our framework and suggest

various research perspectives on its basis.

PART 1: PARADOX IN THE ENTREPRENEURIAL PROCESS

Economic and managerial literature recognizes that the entrepreneurial action is typically

characterized by a discontinuity in economic process (Gartner, Bird, & Starr, 1992). This action

creates a rupture in the existing business state of the world to give birth to a new organization. It is


5/39

- 5 -

a jump from non-existence to existence, from potential to real without other continuity in the

process but the role played by a specific individual the entrepreneur.

From resource holders to stakeholders

The entrepreneurial action presents a somewhat ambiguous nature in that it is both one which

generates a discontinuity in economic order by creating new ways of realizing value, and at the

same time, it is one which ensures continuity in economic order by combining different economic

resources which existed before. This ambiguous dimension of the entrepreneurial action is a way

of understanding from a micro-evolutionary point of view what Schumpeter (1934) coined

creative destruction from a macro-evolutionary point of view. At the center of the

entrepreneurial process lies the transformation of resource holders into stakeholders.

Fundamentally, we can identify three steps in this process as shown in figure 1.

Insert Figure 1 about here

OA represents the pre-organization period as defined by Katz and Gartner (1988). This is the

stage where the nascent entrepreneur realizes or sees to use Penroses word (1959) that there

is a potential opportunity to be exploited. He or she perceives an anomaly (Vesper, 1980) or

under-exploited potential in the marketplace (Kirzner, 1973). At this stage, the entrepreneur

clearly shows an intention a cognitive representation of both means and end to set up a

business venture (Bird, 1988; Tubbs & Ekelberg, 1991).


6/39

- 6 -

AB describes the rupture in the economic scenario (plan). The entrepreneur not only estimates

potential value, but also decides to create favorable conditions to realize it and jumps from

business state of the world 1 where resource holders are, to business state of the world 2 where

the future organization is supposed to combine the interests of stakeholders. In doing so, he or she

creates a discontinuity for he imagines a scenario which still does not exist for the other actors.

BC is the process of the formation of the organization, where the entrepreneur works towards

bringing the resources together, creating the product, attracting customers or hiring employees.

BC stage of the process can be said to be concerned with the transformation of independent

resource holders into stakeholders. Resources holders move along the path BC, pulled along by

the sheer will and energy of the entrepreneur, who in his entrepreneurial vision has already

achieved point C. According Katz & Gartner's definition (1988), point C in figure 1 is the

threshold where a new organization has come into existence and is sustainable in business state of

the world 2. One can claim, of course, that the three stages are not sequential and may interact

(Reynolds & Miller, 1992). This claim allows better understanding of empirical observations but

does not change the nature of the process.

Most of the studies have thus focused on the characteristics of the entrepreneur and on one

particular stage of the entrepreneurial process: the psychological characteristics of business

founders (Brockhaus, 1980; DeCarlo & Lyons, 1979; Gartner, 1985; McClelland, 1961),

personal characteristics (Stanworth, Blythe, & Stanworth, 1989; Reynolds, 1991), previous work


7/39

- 7 -

experience (Storey, 1982; Ronstadt, 1988), family background (Krueger, 1993; Mathews &

Moser, 1996), gender (Buttner & Rosen, 1989; Kolvereid, Shane, & Westhead, 1993), and

education (Brockhaus & Nord, 1979; Storey, 1982). It doing so, researchers fail or simply avoid

building a complete framework to understand the logic of the entrepreneurial process leading from

point O to C (Low & MacMillan, 1988). The claim of this article is that the lack of general

framework is due to a fundamental paradox inherent in the very nature of the entrepreneurial

process.

The Entrepreneurial Paradox

As noted above, the entrepreneur both creates discontinuity by his way of seeing new

opportunities and continuity by his commitment. In order to understand the logic of this process

one question must be answered: how can we evaluate the output of the entrepreneurial process

before the organization is created (Baumol, 1982) ? This question is crucial to understanding the

rationale that resource holders use in judging whether they want to become stakeholders or not.

The answer to this question is based on a paradox.

On the one hand, at point O (figure 1), the entrepreneur is an individual who sees abnormality

(Penrose, 1959) or opportunities (Kirzner, 1979) and the possible jump to the business state of

the world 2 by combining resources in order to create value. In this process he tries to give value

to products, services, or processes which are often initially opposed by market forces in the

business state of the world 1. This view supposes that opportunities exist somewhere (but where?)


8/39

- 8 -

before the process of firm creation, and are seen by nobody but an astute entrepreneur. This

underestimates the creation of opportunities by entrepreneurs. As Christensen (1997)

remarked, the creative process is not only a question of seeing abnormality in the market but it is

also the ability to maintain it against the doubts and suspicions of market players. This is

particularly true in the case of radical innovations. These are based on disruptive technologies and

often present teething problems that spoil the customers bottom line. The creation of the new

organization is the last step in a dynamic process of overcoming resistance to economic change

and moving on to a different plane business state of the world 2. From this point of view, the

evaluation of the entrepreneurial process escapes the market forces before it is ended, i.e. an

organization is created in a business state of the world 2. On the contrary, the new organization

contributes to create or simply to maintain the market. This can be called the genetic problem.

On the other hand, traditional literature suggests that the entrepreneurial process is evaluated as

efficient if it gives rise to a profitable organization (Cole, 1968). Using a biological metaphor, we

could say that the organization must be viable for the struggle of life in a competitive environment.

An entrepreneur is an individual who captures potential benefits to deliver new value. His or her

ideas must create an organization which fits its competitive environment and generates profit,

hence creating incentives for resource holders to invest in the nascent venture. Thus, normal

methods of evaluation must be used to assess the entrepreneurial project, by comparing it to other

organizations which already evolve in business state of the world 2. From this point of view, the

evaluation of the entrepreneurial process is left to the market forces. This can be called thefitness

problem.


9/39

- 9 -

The confrontation between the genetic and the fitness problem creates a paradox in studying the

entrepreneurial process. Indeed, there is on the one hand abnormality linked to the purpose until

the organization is created in a new business state of the world (say, 2) and, on the other hand,

normal evaluation by profit maximization according to the rules of the market as if the

organization was already created. This paradox questions the evaluation of the entrepreneurs

action during the organization formation process and thus places the genetic problem in

opposition to the fitness problem. The further the final business state of the world of the new

organization is from that of the resource holders, the more difficult it is to solve the paradox.

The Knight-Casson Framework

Knights (1921) seminal work is perhaps the most accomplished and well regarded attempt at

bringing a solution to the entrepreneurial paradox. Knight put forth the notions of risk and

uncertainty. He noted that the role of the entrepreneur consists of turning uncertainty into risk. At

the beginning of the entrepreneurial process, resource holders feel uncertainty. They cannot

evaluate the future output for it does not refer to normal rules of evaluation and they have no

similar examples which can help them to make a comparison. The role of the entrepreneur consists

therefore in giving them reasons to consider the future organization as profitable. In doing so, the

organization becomes certain according to Knight, i.e. it can generate profit ([a ; + b])

according to a given probability which defines a risk (p[0 ; 1]). Consequently, evaluation [e

{(pi; I)}] is possible for the potential organization within a competitive environment . Uncertainty


10/39

- 10 -

thus gives way to risk. Casson (1982) completed the framework from a classical microeconomic

perspective and suggested that the resource holders calculate their profit as ifthe organization was

already existing in business state of the world 2 in order to decide whether or not to bring their

resources in. The evaluation of the risk is therefore possible as the calculation resulting in a trade-

off between risk and interest.

Within the Knight-Casson framework, the entrepreneur is an individual who reveals information on

future possibilities of creating value and then effectively realizes value. Similarly, Knight (1921)

describes the entrepreneur as an agent who is willing to be responsible for discretionary decisions.

Profit is then the reward for exercising the entrepreneurial function. Alongside this theoretical

approach (cf. Kirzner, 1979; Marshall, 1961; Schumpeter, 1934) the entrepreneur is ontologically

an outstanding being, whose personal qualities explain his or her ability to transform uncertainty

into risk by creating confidence in the future. This seminal framework has become classical and

still inspires many studies in entrepreneurship. This explains why the literature focuses on the

entrepreneur rather than on the entrepreneurial process, and attempts to define the social raison

dtre of the entrepreneur. Nevertheless, it does not really solve the entrepreneurial paradox.

First, the entrepreneur appears as a deus ex machina, who succeeds in managing the

entrepreneurial process because it is gifted by very definition with the qualities of an

entrepreneur. This looks rather tautological as it does not explain how the entrepreneur acts in

order to turn uncertainty into risk. We come back to the genetic problem. The Knight-Casson


11/39

- 11 -

approach makes clearer the nature of the entrepreneur but it does not solve the question of the

contentof his role in the evolution from O to C in figure 1.

Secondly, the Knight-Casson approach tries to solve the entrepreneurial paradox by removing

one of its two terms: the role of abnormality in the entrepreneurial process. The raison dtre of

the entrepreneur is reduced to making people aware of potential profit. This approach neglects the

fact that the entrepreneur is first and foremost an individual who invents a new way of realizing

value often considered as abnormal by the resource holders (Spinosa, Flores, & Dreyfus,

1997). How can those resource holders be convinced that the entrepreneurs idea will generate

profit in business state of the world 2 while it is by definition impossible to assess in business state

of the world 1? Consequently, the Knight-Casson approach underestimates another type of

uncertainty which arises from the ignorance amongst resource holders concerned with the

entrepreneurial project about what each of them will do. Indeed, the emergence of the

organization depends strongly on how the set of resource holders will act, and more precisely if

they will all act in the same way. The role of the entrepreneur consists therefore in creating

commitment from all resource holders until they become stakeholders. This suggests that the final

business state of the world 2 in figure 1 is path-dependent to the very entrepreneurial process. No

firms can be thought without taking into account its genesis which determines the combination

between resource holders and consequently its final shape.

This suggestion is consistent with empirical observations which show that between 10% and 50%

of new organizations fail in the first five years after their launch, depending on the definition of


12/39

- 12 -

failure used (Brderl, Preisendrfer & Ziegler, 1992; Everett & Watson, 1998). The Knight-

Casson approach, because it subordinates the genetic problem to the fitness problem, leaves the

following question unsolved: why do so many unviable organizations come into existence?

Resource holders are pulled into an organization formation process which in the end does not yield

any profit and fails. What is the rationality of the resource holders in such a case? Are they

systematically less rational than economists? The fact that all organizations that are formed are not

necessarily viable, calls for a framework which can explain the logic of the entrepreneurial process

as one which is not totally determined by the ex posteconomic performance.

The Need For an Evolutionary Framework

The entrepreneurial paradox is intrinsically dependant on how time is considered in the dynamics

of entrepreneurship. As pointed out by ODriscoll and Rizzo (1985) the way of considering time is

crucial in solving this kind of paradox since abnormality is an ex ante point of view (before the

organization is actually created) while efficiency appears ex post (after its creation). Ex ante

reasoning operates a forward projection and assumes that abnormality is a static situation

alongside the dynamic process, while ex postreasoning observes the process from the point of

view of the final competitive environment.

To some extent, the entrepreneurial paradox exists because one wants to understand the behavior

of the entrepreneur and resource holders as if they were reasoning and acting in a static and

necessary world, while they are concerned with a dynamic and contingent process. The


13/39

- 13 -

entrepreneurial process both determines the future competitive environment and creates the

entrepreneur since nobody can be called an entrepreneur before he or she is involved in an

entrepreneurial process. Calculation, anticipation and scenario building can provide the rationale

for these choices but they do not explain how and why different choices end up giving rise to an

organization. If the abnormality and perspectives for profit are produced during the

entrepreneurship process, then the fitness is indeterminate before the end of the process.

As a consequence, we need to pay more attention to the genetic problem than to the fitness

problem. Organizations come into existence according to a genetic process which needs to be

understood on its own. Metaphorically, organizations can be observed, just like organisms coming

into existence are observed by a biologist. Of course, fitness is crucial to give meaning to the

process but it cannot be interpreted as the engine of the process itself. This separation is the basis

of the evolutionist paradigm as evidenced by the neo Darwinian synthesis (Mayr, 1985). That is

why we suggest using it in order to revisit the entrepreneurial process from an evolutionary

perspective.

PART TWO: AN EVOLUTIONARY FRAMEWORK FOR THE

ENTREPRENEURIAL PROCESS

From part one, we conclude that any framework that seeks to explain the entrepreneurial process

must achieve two targets: (1) explain both continuity and discontinuity in the process, and (2)

resolve the entrepreneurial paradox of abnormality versus profit maximization. In order to avoid


14/39

- 14 -

the same criticism that is directed towards the Knight-Casson approach we must (1) define the

entrepreneur as someone else than a deus ex machina, but rather as part of the dynamics

influenced by evolution, and (2) understand the entrepreneurial process per se independently of

the viability of the organization, and consequently explain why firms emerge even if they fail later.

Our approach is based on Campbells (1965) work in evolutionary theory and its blind-variation-

selection-and-retention logic. Evolutionary theorists have not paid enough attention to

entrepreneurship (Aldrich & Fiol, 1994). Instead, evolutionary research has focused primarily on

environmental discontinuities. Drawing on, for example, the population ecology perspective the

emergence of new business ventures can be seen as blind variation in the process of economic

growth, which selects and retain the fittest firms. (Greenfield & Strickon, 1986; Hannan &

Freeman, 1977). In doing so, researchers consider the entrepreneurial process as a black box

from a macro social perspective. Yet, Aldrich & Kenworthy (1999:31) argued that: Researchers

need to turn their attention to nascent entrepreneurship and the founding process at the

organizational level of analysis, not only to understand more about the process and activities

leading to organizational emergence but also to complement existing population-level theories.

We precisely aim to unravel this black box mystery in the second part of this article by examining

the entrepreneurial process from a micro social perspective. In this respect, we consider the

entrepreneurial process as the by-product of an evolutionary process whom the result is a blind

variation at the macro social level.


15/39

- 15 -

In this second part, we outline an evolutionary framework, by suggesting and discussing a

definition of the entrepreneur and a series of six propositions. This framework operates under the

assumption that during the entrepreneurial process, the space-time dimension in which the

entrepreneur and resource holders operate is different at the beginning of the process yet become

identical at its end. The initial time lag constitutes an initial blind variation, and involves an exchange

of energy between the entrepreneur and the resource holders. This generates an evolutionary

process through the selection and retention of resources until their progressive convergence in the

same space-time dimension.

Revisiting the Entrepreneur

From an evolutionist point of view, the entrepreneurial process can be perceived as a catalysis

(Kets de Vries, 1970) synthesizing independent resource-holders to result in a new self-regulating

system of stakeholders. For clarity, we classify the resources involved in the process into three

categories: economic resources including workers, knowledge, plant, and machines, finance

providing the future organization with a mean of positioning its input and output at the right point in

time for optimum impact and consumers who allow the organization to enter a new cycle of

production and thus make the organization viable.

The catalysis of the resourcesdoes not suppose an addition but rather a new combination and

transformation of resource holders. Before entering into the entrepreneurial process, each of these

resources had a certain potential value. Having become a part of the entrepreneurial process,


16/39

- 16 -

these resources are a part of an interdependent system and their value is dependent upon the

simultaneous presence of each other. The quality of the combination of resources determines

whether the value of the sum is higher or lower than the sum of values.

We suggest considering the entrepreneur as a type of resource amongst others in the

entrepreneurial process. The entrepreneur can be seen as a source of energy that acts from the

beginning of the process and disappears at the end, when the entrepreneur evolves to become a

manager in the newly formed organization (Shaver & Scott, 1991). Just like a chemical agent,

the capability of forging links which synthesize independent resources is the specific contribution

of the entrepreneur to the process. The action of this resource relates to the other resource-

holders and develops relationships with them, therefore leading them to work towards the

common process of catalysis which finally gives way to a new organization.

Definition: The entrepreneur must be considered as a resource amongst others, which

provides the entrepreneurial process with a factor of catalysis by forging relations between

independent resource holders.

Evidence and support for this approach are provided by the literature on networks, which shows

the entrepreneur as an individual who taps into a pool of resources to create his new organization

in a competitive environment (Carsud, Gaglio, & Olm, 1987; Johannisson, 1990). Hence the

entrepreneurial process defines entrepreneurs themselves as a resource. The more this individual

acts to gather resources and synthesize them, the more he becomes an entrepreneur and


17/39

- 17 -

becomes himself synthesized within the process. This definition allows us to escape from the

tautology that describes entrepreneurs as those who support entrepreneurship. In our view,

entrepreneurship is concerned with the conjunction and convergence of resources in which the

entrepreneur plays a role amongst others as a factor of catalysis and is retrospectively defined

by the process. The following six propositions aim to refine the content of the role and action of

the entrepreneur and the coherent mechanism of catalysis.

Defining blind variation as a projection

Time lag and accumulation of energy. Central to the definition previously outlined is the role of

the entrepreneur as a chemical factor of catalysis who brings resource holders together. This

role requires both a high level of energy and the ability to sustain temporal tension (Bird, 1992:

12) to stretch between a vision of what could be and current conditions. The notion ofprojection

(Gomez & Korine, 1999) is the key concept for understanding the specific role of the

entrepreneur. Generally speaking, projection means that people sometimes already acts as if

the future already existed. This disruptive behaviors create perturbation in the economic world.

Projection is a blind variation, a mutation or an anomaly in the normal dynamics of business.

The mechanism of this mutation can be due to the entrepreneurs inherent characteristics, or

behavioral traits, the circumstances in which he or she may be, or an accident, or simply a mistake

and possibly a combination of these (Aldrich & Kenworthy, 1999). Whatever its origin, it is

sufficient to assume that the mutation consists of an alteration of the entrepreneurs space-time


18/39

- 18 -

dimension. The space is modified because the entrepreneur acts in another state of business

world. Time is different because the entrepreneur projects him or herself in to another state of the

world and hence thinks and acts at another level from other resources which are still in the

present. This variation creates a virtual time lag between them. As a consequence, two space-

time dimensions simultaneously co-exist and are confronted: that of the entrepreneur and that of

the other resource holders.

The entrepreneur does not only see an anomaly (Gartner, 1985) he acts a-normally. As a

mutant, the entrepreneur is abnormal. Thus, he tries to transform the vision and the behaviors of

other resources in order to make them act in his own space-time. In other words, entrepreneurs

are individuals who try to reduce their abnormality by making others as abnormal as they are. This

is the proper specificity of their action as catalyst. The time lag provides the entrepreneur with

the amount of energy required to change the space-time position of others. We will call it

Transforming Energy or ET.

Proposition 1. The entrepreneurial process is characterized by an initial lag between

entrepreneurs space-time and the space-time of the other resources which charges the

entrepreneur with Transforming Energy.

This proposition is consistent with a large amount of evidence and observations that describe

entrepreneurs as both visionary and full of energy (Gilder, 1992), resilient (Mc Clelland, 1961),

and possessing the ability to convince people that they are right (Aldrich, 1999). This is also


19/39

- 19 -

consistent with the classical Schumpeterian opposition between inventor and entrepreneur. A

visionary without energy is an inventor or a dreamer. As a result of projection, the entrepreneur is

the one who acts in the future and because he is consequently charged with the energy to carry

along other resources in doing so. According to our proposition this energy does not come from

specific characteristics of a superman or superwoman but simply from a blind variation, an

anomaly that exists because an actor does not act in the same space-time dimension as the others.

The entrepreneurial process and the genesis of organizations can be revisited as a process of

exchange of energy between the resources holders as we will show further.

Reduction of time lag and expenditure of energy. Whatever the reasons which lead to the

initial blind variation, the important issue in our framework is the energetic effect of the

entrepreneur and how it triggers selection and retention of resources. This is indeed the condition

for the resources to come together in the same space-time. Transforming Energy ET accumulated

will be expended in selecting resources (DS) and retaining them (DR), such that ET=DS+DR. Once

again, the entrepreneur is not a deus ex machina but a resource which has accumulated energy

and discharges it in taking part in the entrepreneurial process. Accumulation and expenditure of

energy during the process first produces and then reduces the initial time lag. This explains why the

entrepreneur disappears at the end of the process: more often than not, when his transforming

energy is exhausted and he or she becomes, if successful, a manager.

Note that the more entrepreneurs project themselves into the future the more Transforming Energy

they accumulate. Indeed, a large gap in the space-time dimension involves a radical change in


20/39

- 20 -

viewing the environment and acting in the entrepreneurial space-time. As a consequence, the

entrepreneur will expend more energy DS and DR in order to select and retain other resources.

Proposition 2: The entrepreneurial process leads to an expenditure of Transforming Energy

in order to fill the initial time lag and triggers selection and retention of resources.

The dynamics of accumulation and expenditure of energy due to time lag opens new perspectives

to understand success versus failure in entrepreneurship as we will show in the following sections.

Defining Selection

From the Knight-Casson point of view, the entrepreneur can and must rationally choose the right

resources in order to achieve his project. This assertion is not consistent with empirical

observations showing that more often than not, selection of resources depends a lot on the

environment of the entrepreneur, his culture and personal network (Aldrich, 1999) or the social

environment (Specht, 1993) in general. It has also been noted that in many cases entrepreneurs

start their new ventures by tapping into their personal circle of friends and relatives (Reynolds,

1997). The social and economic context of entrepreneurs exists before their projection. They

adapt their targets to the resource holders they feel they are able to mobilize (Aldrich &

Kenworthy, 1999). This is perfectly rational or at least reasonable for, as said before, the

entrepreneur expends a quantity DS of his total Transforming Energy ET in order to select

resources.


21/39

- 21 -

The more difficult it is to find and attract resources, the higher the expenditure of energy DS and

DR. As a result, the entrepreneur rationally tends to limit the expenditure of Transforming Energy

by focusing on the resources that are the easiest to find. In Simons (1954) words, satisfying is

more realistic than pure maximization. Thus, rather than a pure economic choice, selection is

highly dependant on circumstances and the social environment of entrepreneurs which constitutes

the initial conditions of the entrepreneurial process.

Proposition 3: The social and economic environment of the entrepreneur constitutes the

initial conditions for the process and defines the level of energy DS the entrepreneur

expends in order to select resources.

Proposition 3 could explain why the entrepreneurial process often ends up with few synthesized

resources which progressively increase after the organization is created (Lumpkin & Dess, 1996).

Conversely, this could also explain why so many organizations are created although they are not

viable and then fail after a certain period of time. Synthesized resources are sufficient to set up a

new organization but they might not be adequate for it to survive in a competitive environment. As

a consequence, training programs and advice must help entrepreneurs enlarge their networks in

order to decrease the energy ES expended to select resources and to provide them with more

opportunity to find the most efficient. Network relationships and contacts are indeed not only

useful to identify opportunities and obtain the initial resources, they are also crucial to sustain the

business venture through the infancy stage (Low & MacMillan, 1988).


22/39

- 22 -

Propositions 1, 2 and 3 help to understand the specific role of the entrepreneur from an

evolutionary point of view using Campbells logic (1965). Time lag provides an explanation about

the reason why one of the resources involved in the process the entrepreneur produces

Transforming Energy in order to select and retain others until they become stakeholders in a new

organization. The question that remains is how this expenditure of energy produces a mechanism

involving the catalysis between resources. In order to answer this question, we must refine the

notion of retention of resources.

Defining Retention

The entrepreneurs action during the st age of retention consists of two dimensions. Firstly, the

entrepreneur acts in order to change the resources space-time dimension. This involves an

expenditure of energy in order to replace the current way of thinking and acting of resource-

holders with an acceptance of another space-time so that they act accordingly. Since something

must be destroyed in the current resource holders state of the world to trigger their shift, let us

call it destructive energy and refer to it with the notation it DR.

Secondly, the entrepreneur simultaneously acts so as to create relationships between resources

holders until they become stakeholders. This expenditure of energy can be called creative energy

and noted DR+. Thus, the total energy DR expended in order to retain resource holders and turn


23/39

- 23 -

them into stakeholders is a combination of destructive and creative energy such as DR = DR+ +

DR_.

Proposition 4: During the entrepreneurial process, retention consists of both destructive

and creative energy.

This proposition is derived from Schumpeters (1934) classical analysis of entrepreneurship as

creative destruction recalled in part 1. Existence of both discontinuity and continuity is re-

interpreted as expenditure of both destructive and creative energy and is a consequence of initial

time lag. The following propositions 5 and 6 aim to refine the mechanism of this energy

expenditure.

Understanding destructive Energy: the Role of Uncertainty. We suggest that the

entrepreneur first approach the resource holders with a intriguing assertion; he or she present a

new business idea, a prototype, some evidence of financial commitment, a potential profit. The

simple why not question arises for the resource holders. The entrepreneur believes in his project

and act consequently expending energy to prove he is right. In doing so he obligates resource

holders at least to consider the possibility that he is effectively right. This provides the entrepreneur

with destructive potential of the state of business of resources. Whatever their final choice may be,

resource holders have made a step towards the entrepreneurs space-time dimension to consider

his present as their possible future, and this triggers their commitment within the entrepreneurial

process.


24/39

- 24 -

Though this may sound contrary to the notion studied in Knights work that the entrepreneur

provides asolution to uncertain situations, we assert that entrepreneurs first create uncertainty

in an economic world. They bring about a discontinuity in the resource holders space-time

dimension and make them face uncertainty. Resource holders do not know how to evaluate the

entrepreneur's action, and therefore do not know how to reciprocate it. But they remain

challenged by a possible commitment. This is the reason why we suggest that retention begins with

destructive energy ER-which produces a disequilibria in the social game and invokes uncertainty

into the process.

Proposition 5: Expenditure of destructive energy DR_ by the entrepreneur creates

uncertainty which enables other resources holders to enter the entrepreneurs space-time.

This proposition is consistent with empirical observations which show that generosity is a

fundamental characteristic of the entrepreneur (Gilder, 1992; Spinosa et al. 1997). According to

our framework, this generosity is not (only) considered as an ethic value or a personal quality.

Paradoxically, generosity typifies the expenditure of destructive energy DR_ . It is a unilateral outlay

of energy to compensate for the time lag. These one-sided actions create a rupture in the normal

space-time and discontinuity and as a consequence force resource holders to modify their own

view on the future.


25/39

- 25 -

Understanding creative Energy: How to create Certainty about the Future? Resource-

holders have then two alternatives available to them. They may decide that they are not attracted

by the entrepreneurial purpose, in which case they give up the game, and the entrepreneurs ideas,

visions or perspectives for profit are not reciprocated. Then retention fails and the entrepreneurial

process cannot move any further. On the other end, they may enter the game and commit their

resources. However, they do not like to commit to an uncertain situation. Why must they trust the

entrepreneur? As Low and Srivatsan (1995) showed, this question leads back to the Knight-

Casson paradox since there is an asymmetry of information about the real skill of the entrepreneur

and the quality of his purpose before the organization come into existence.

This difficult question can receive new light if we consider that the uncertainty fundamentally stems

from the asymmetry of information about whether or not other resource-holders will also

participate in the entrepreneurial process. The value of each resource, once committed to the

system, is dependent upon the value and contribution of other resources. Therefore, the

propensity of a resource holder to commit is affected by the simultaneous commitment of other

resource holders.

As a consequence, we suggest that the entrepreneur turns uncertainty into risk by signaling to each

resource holder the commitment of others. As defined in the starting point of the framework, the

entrepreneurs activity mainly consists of forging relations between resource-holders. By

expending energy, entrepreneurs do not only create a discontinuity in the resource-holders space-

time, they also convey information and signals that could convince each resource-holder that the


26/39

- 26 -

otherresource-holders are also willing to commit their resources. The entrepreneurs skill lies in

his or her capacity of enactment (Weick, 1979) For example, the entrepreneur may spend time

and energy explaining the business plan to the banker. By doing so, he or she would succeed in

either obtaining financial support in principle from the banker, or at least the attention of the

banker. This signals to the other resource holders that the banker is interested in investing time,

and possibly capital into the new venture. Because they trust the banker, this will reduce the level

of uncertainty for them, and they will be willing to take the new venture more seriously. As the

resource holders begin to respond by committing their resources new signals are transferred by

the entrepreneur. Consequently, if each resource holder believes that the others will contribute to

the new venture, he will in turn commit to the new venture, and thus, the new organization

becomes self-fulfilled and ends as a self-regulated system. As noted by Low and Srivatsan

(1995:75), to some extent, all ventures are self-fulfilling prophecies.

Proposition 6: Expenditure of creative energy by the entrepreneur operates as a transfer of

information about the commitment of resource-holders in progress until the system

becomes self-regulated into an organization.

What role does profit play in this process? Each resource-holder has his own interest and view in

mind about the entrepreneurial process. The prospect of future profit operates as an argument

during the stage of retention when the entrepreneur plays the role of catalyst. Each resource-

holder can estimate and discuss the viability of the forthcoming organization from his own point of

view and, as a consequence, the opportunity of their own gain. However, the crux of the problem


27/39

- 27 -

lies in the necessary simultaneous behaviors of all the resource holders. Each of them can expect

this viability of the future organization for egotistic reasons, but no one can calculate rationally

the viability of the forthcoming organization before knowing the degree of commitment of the other

resource holders. The fact that other resource-holders seem to believe in the future viability of the

venture is crucial in their decision to commit and make it self-fulfilling. Amongst others signals,

anticipation of profit indicates a potential commitment of resource holders.

According to our framework, the entrepreneurial process is ruled by its own evolutionary

mechanism. Anticipation of viability of the future organization plays a role as a common

denominator in order to rally resource holders. Nevertheless, the genetic and fitness processes are

separated and the mechanism of organization genesis is described independently to its final

success or failure. Figure 2 summaries the six propositions which constitute our framework.

Insert Figure 2 about here

CONCLUSION

This paper sheds light on the process of organization formation from a new perspective drawing

from evolutionary theory. Based on Campbells (1965) seminal work, our framework helps to

clarify the mechanism leading to the emergence of organizations. It opens the black box of

entrepreneurial process viewed as a blind variation and it shows that this process can be

sequenced as a blind variation, selection, and retention. Once the organization is created, the


28/39

- 28 -

competitive pressure operates and eliminates the weakest, as natural selection operates in a

Darwinian perspective. Our framework helps to explain why so many organizations are created

but disappear after a short period of time. In such a case, entrepreneurs succeed in synthesizing

resources but the new organization does not survive in its environment. Using the biological

metaphor, it could be said that economic evolution and growth is the consequence of many blind

variations which finally succeed in surviving or not. As for species, this profusion which leads to

success as well as to failure is the even condition of global evolution. This is the reason why the

understanding of the genetic process of organization must consequently be observed on its own.

This separation allows us to overcome the Knight-Casson paradox. Economic rationality is not the

normal way to evaluate the abnormality of entrepreneurship. Our framework points out that

the entrepreneurs action stems rather from an appropriate expenditure of energy than an

appropriate economic calculation. Table 1 summarizes the differences between the classical

economic view on entrepreneurship and the one supported by our evolutionist framework and it

suggests questions which could be revisited from this perspective. The third column of the table

allows us to underline that the classical economic perspective makes it difficult to interpret some

empirical results of entrepreneurship. In that respect, our evolutionist view is an attempt to provide

a framework to the empirical evidence.

Insert table 1 about here


29/39

- 29 -

From a practical perspective, as the entrepreneurial process revolves around three stages

(projection, selection, and retention), it is important that the entrepreneur devotes his/her energy in

a well-balanced fashion on those three steps for the organization to emerge. It would be

insufficient to be a visionary architect focusing on the projection stage, thus identifying an

opportunity and defining an excellent business idea, but failing to identify the resources and to get

their commitment to set up the business venture. Conversely, it would be fruitless to be a

contractor with an established network of resource holders and good networking skills, but

without the initial vision and appeal of a good business idea.

Accordingly, we can make three recommendations to foster entrepreneurship:

Create conditions and build spaces where projection is possible and where one can be a

visionary architect without feeling ashamed. This can be achieved by developing

network settings where individuals can exchange ideas and identify opportunities. Indeed

opportunities do not drop from the sky; they are created as a result of ongoing

relationships and exchanges.

Minimize the cost of selection. The nascent entrepreneur should spend a minimum amount

of energy to find the adequate resource holders bankers, venture capitalists, suppliers,

qualified staff, and adequate premises to launch the business venture.

Allow the entrepreneur to focus his energy on retention during which resources holders

become stakeholders in the emergent venture. These stake holders then have a collective

interest in the business venture and commit themselves to it, ensuring in turn its successful

launch. Conversely, potential resources holders such as venture capitalists, employees,


30/39

- 30 -

and suppliers must keep in mind that their own commitment during the process is part of

the success in the genesis of the organization, but does not necessarily ensure its survival in

the long term.


31/39

- 31 -

REFERENCES

Aldrich, H.E. 1999, Organizations evolving, London: Sage Publications.

Aldrich, H.E. 1990, Using an ecological perspective to study organizational founding rates,

Entrepreneurship Theory and Practice , 14: 7-24.

Aldrich, H.E., & Fiol, M.C. 1994, Fools rush in? The institutional context of industry creation,

Academy of Management Review, 4: 645-670.

Aldrich, H.E., & Kenworthy, A.L. 1999, The accidental entrepreneur: Campbellian antinomies

and organizational foundings, in J.A. Baum & B. McKelvey (Eds.), Variations in

organization science: 19-33, Thousand Oaks, CA: Sage Publications.

Baron, R.A. 1998, Cognitive mechanisms in entrepreneurship: Why and when entrepreneurs think

differently than other people, Journal of Business Venturing, 13: 275-294.

Baum, J.A., & McKelvey, B. (Eds.) 1999, Variations in organization science, Thousand

Oaks, CA: Sage Publications.

Baumol, W.J. 1982, Toward operational models of entrepreneurship, in J. Ronen (Ed.),

Entrepreneurship: 29-48, Lexington, MA: Lexington Books.

Bird, B.J. 1988, Implementing entrepreneurial ideas: The case for intention, Academy of

Management Review, 13: 442-453.

Bird, B.J. 1992, The operation of intentions in time: The emergence of the new venture,

Entrepreneurship Theory and Practice , 17: 11-20.

Brockhaus, R.H. 1980, Risk taking propensity of entrepreneurs, Academy of Management

Journal, 23: 509-520.


32/39

- 32 -

Brockhaus, R.H., & Nord, W.R. 1979, An exploration of factors affecting the entrepreneurial

decision: Personal characteristics vs. environmental conditions, Proceedings of the

Academy of Management: 364-368.

Brderl, J., Preisendrfer, P. & Ziegler, R. 1992, Survival chances of newly founded business

organizations, American Sociological Review, 57: 227-242.

Buttner, E.H., & Rosen, B. 1989, Funding new business ventures: Are decision makers biased

against women entrepreneurs, Journal of Business Venturing, 4: 249-261.

Campbell, D.T. 1965, Variation and selective retention in socio-cultural evolution, in H.R.

Barringer, G.I. Blanksten & R.W. Mack (Eds.), Social change in developing areas: A

reinterpretation of evolutionary theory: 19-48, Cambridge, MA: Schenkman.

Carsud, A.L., Gaglio, C.M., & Olm, K.W. 1987, Entrepreneurs-mentors, networks, and

successful new venture development: An exploratory study, American Journal of Small

Business, Fall: 13-18.

Casson, M. 1982, The entrepreneur: An economic theory, Totowa, NJ: Barnes & Noble

Books.

Christensen, C.M. 1997, The innovators dilemma, Cambridge, MA: Harvard Business Press.

Cole, A.H. 1968, Meso-economics: A contribution from entrepreneurial history, Explorations in

Entrepreneurial History, 6: 3-33.

DeCarlo, J.F., & Lyons, P.R. 1979, A comparison of selected personal characteristics of minority

and non-minority female entrepreneurs, Journal of Small Business Management, 17:

22-29.


33/39

- 33 -

Everett, J., & Watson, J. 1998, Small business failure and external risk factors, Small Business

Economics, 11: 371-390.

Gartner, W.B. 1985, A conceptual framework for describing the phenomenon of new venture

creation, Academy of Management Review, 10: 696-706.

Gartner, W.B, Bird, B.J., & Starr, J.A.1992, Acting as if: Differentiating entrepreneurial from

organizational behavior, Entrepreneurship Theory & Practice, 16: 13-31.

Gilder, G. 1992, Recapturing the spirit of enterprise, San Francisco: ICS Press.

Gomez, P.Y., & Korine, H. 1999, The leap to globalization: An economic explanation and a

management framework, SLRP WP62/1999, London: London Business School.

Greenfield, S.M., & Strickon, A. 1986, Entrepreneurship and social change, Lanham, MD:

University Press of America.

Hannan, M.T., & Freeman, J. 1977, The population ecology of organizations, American Journal

of Sociology, 82: 929-964.

Johannisson, B. 1990, Economies of overview: Guiding the external growth of small firms,

International Small Business Journal, 9: 32-44.

Katz, J., & Gartner, W.B. 1988, Properties of emerging organizations, Academy of

Management Review, 13: 429-441.

Kets de Vries, M. F. R. 1970, The entrepreneur as catalyst of economic and cultural

change, unpublished doctoral dissertation, Harvard University, Graduate School of

Business Administration.

Kirzner, I. 1973, Competition and entrepreneurship, Chicago: Chicago University Press.

Kirzner, I. 1979, Perception, opportunity and profit, Chicago: University of Chicago Press.


34/39

- 34 -

Knight, F.H. 1921, Risk, uncertainty and profit, New York: Houghton Mifflin.

Kolvereid, L., Shane, S., & Westhead, P. 1993, Is it equally difficult for female entrepreneurs to

start businesses in all countries?, Journal of Small Business Management, 31: 42-51.

Krueger, N. 1993, The impact of prior entrepreneurial exposure on perceptions of new venture

feasibility and desirability, Entrepreneurship Theory and Practice , 18: 5-21.

Low, M.B., & MacMillan, I.C. 1988, Entrepreneurship: Past research and future challenges,

Journal of Management, 14: 139-161.

Low, M.B., & Srivatsan, V. 1995, What does it mean to trust an entrepreneur? in S. Birley &

I.C. MacMillan, International entrepreneurship: 59-78, London: Routledge.

Lumpkin, G.T., & Dess, G.G. 1996, Clarifying the entrepreneurial orientation construct and

linking it to performance, Academy of Management Review, 21: 135-172.

Marshall, A. (1961), Principles of economics , 9th edition, New York: MacMillan.

Matthews, C.H. & Moser, S.B., 1996, A longitudinal investigation of the impact of family

background and gender on interest in small firm ownership, Journal of Small Business

Management , 34(2): 29-43.

Mayr, E., 1985, The growth of biological thought: Diversity, evolution, and inheritance,

London: Belknap Press

McClelland, D. 1961, The achieving society, Princeton, NJ: Van Nostrand.

Moran, P., & Goshal, S. 1999, Markets, firms, and the process of economic development,

Academy of Management Review, 3: 390-412.

ODriscoll G.P., & Rizzo, M.J. 1985, The economics of time and ignorance, London:

Blackwell.


35/39

- 35 -

Penrose, E.T. 1959, The theory of the growth of the firm, New York: Wiley.

Reynolds, P.D. 1991, Sociology and entrepreneurship: Concepts and contributions,

Entrepreneurship Theory and Practice , 16: 47-70

Reynolds, P.D., & Millier, B. 1992, New firm gestation: Concept, birth, and implications for

research, Journal of Business Venturing, 7: 405-417

Reynolds, P.D., & White, S. 1997, The entrepreneurial Process: Economic growth, men,

women, and minorities, Westport, CT: Quorum.

Romanelli, E. 1989, Organization birth and population variety: A community perspective on

origins, in B.M. Staw & L.L. Cummings (Eds.), Research in organizational behavior:

211-246, Greenwich, CT: JAI Press

Ronstadt, R. 1988, The corridor principle, Journal of Business Venturing, 3: 31-40.

Shaver, K.G., & Scott, L.R. 1991, Person, process, choice: The psychology of new venture

Creation, Entrepreneurship Theory and Practice , 16: 23-46

Schumpeter, J.A. 1934, The theory of economic development, Cambridge, MA: Harvard

University Press.

Simon, H.A. 1954, Administrative behavior, New York: The Free Press.

Specht, P.H. 1993, Munificence and carrying capacity of the environment and organization

formation, Entrepreneurship Theory and Practice, 17: 13-23.

Spinosa, C., Flores F., & Dreyfus, H. 1997, Disclosing new worlds, Cambridge, MA: MIT

Press.

Stanworth, J., Blythe, S. & Stanworth, C. 1989, Who becomes an entrepreneur? International

Small Business Journal, 8: 11-22.


36/39

- 36 -

Storey, D.J. 1982, Entrepreneurship and the new firm, London: Croom Helm

Tubbs, M.E., & Ekelberg, S.E. 1991, The role of intentions in work motivation: Implications for

goal-setting theory and research, Academy of Management Review, 16:180-199.

Vesper, K.H. 1890, New venture strategies, Englewood Cliffs, NJ: Prentice Hall.

Weick, K.E. 1979, The social psychology of organizing, Reading: Addison-Wesley.


37/39

- 37 -

FIGURE 1

The key steps of the entrepreneurial process

Stages ofthe Process

Time

Identification of opportunities

Generation of ideas Identification of resource

holders

Bringing the resources together Development of product /service Generating stakeholders

O

A

B

C

Organization

creation

Business stateof the world 1

Business state

of the world 2

Rupture


38/39

- 38 -

FIGURE 2

The entrepreneurial process from an evolutionary perspective

0

Initial lag between

the entrepreneurs

space- time and the

space-time of other

resource holders

BLIND VARIATION

or PROJECTION

This mutation

charges the

entrepreneur with

Transforming

Energy

The entrepreneur

expands the

Transforming

Energy to select

and retain resources

RETENTION

SELECTION

The entrepreneur expands

creative Energy transferring

information about the

commitment of other

resource holders

The entrepreneur expands

destructive Energy to

create uncertainty

The organization

becomes self- fulfilled

and comes

into existence

Stages of the

Entrepreneurial

process

Time

Business state

of the world 1

Business state

of the world 2


39/39

- 39 -

Table 1Comparison between classical economic and evolutionist approach of entrepreneurial

process

Classical EconomicApproach

Evolutionist Approach

Result of research

Matching theEvolutionist Framework

Central factor forentrepreneurial

process

The existence of

potential opportunitiesfor profit is the reason

why new organizationsare created.

The fitness explains the

genesis of theorganization

Time lag between people

who do not act in the samespace-time dimension is

the engine for newentrepreneurial ventures.

The fitness and the genesis

obey two distinctmechanisms

Most new ventures comeinto existence but do not

survive (Brderl,Preisendrfer & Ziegler,

1992; Everett & Watson,1998; Reynold & White,

1997)

Opportunities

The entrepreneur seesand realizes

opportunities whichpotentially exist before

the entrepreneurialprocess

The entrepreneurial processcreates the conditions for

the existence and thedevelopment of what will be

seen ex postasopportunities

The existence of neworganizations and the

creation of value are pathdependant (Aldrich, 1999;

Low & MacMillan, 1988)

Role of profitSearch for profit is theengine for

entrepreneurship

Profit is an argument forconvincing resource holders

to commit in the process

Most entrepreneursconsider profit as a

consequence rather thana cause of the

entrepreneurial venture

(Johannisson, 1990; Ketsde Vries, 1970)

Nature of theentrepreneur

The entrepreneur is

gifted with specialqualities

The entrepreneur is theproduct of an accident a

blind variation in thedefinition of common

business space-time

The success of

entrepreneurs is notcorrelated with social,

cultural or psychologicalfactors but depends of

appropriate conditions forexpending energy (Baron,

1998; Gartner, 1985)

Uncertainty

In the economic game,

the entrepreneur turnsuncertainty into risk

In the economic game, the

entrepreneur generatesboth uncertainty and risk

The entrepreneur uses

asymmetric informationabout the commitment of

resource holders (Low &Srivatsan, 1995;

Romanelli, 1989)

Documents

How Do Organizations Come Into Existence - Towards an Evolutionary Theory of Entrepreneurship